Japan: Samurai bonds maintain their strength

Not all news out of Greece is grim for bondholders.

At the end of last month Athens said that the 20-year bonds it had sold to investors in Japan in the mid-1990s would not be subject to haircuts - for now, at least.

In Tokyo, holders of Y109bn of "samurai" bonds breathed a sigh of relief.

Not that the market for samurai - yen-denominated debt issued in Japan by foreign companies and governments - needed much of a fillip.

During the global market turmoil last summer, while dollar and euro markets saw primary issuance from even top-rated borrowers slow to a trickle, samurai deals kept appearing.

Last year saw a total of $25.3bn raised from 39 issues, with the lead taken by Australia - one of a diminishing number of triple-A-rated countries - and South Korea.

That was the biggest haul since 1996, according to Dealogic, the data tracker, 2011 has begun even more strongly - $7bn from eight deals.

Strong demand is being matched by supply. Overseas companies and governments remain keen to tap Japan's abundant liquidity for dependable, relatively cheap funding.

Yields on samurai bonds for investment-grade companies, for example, are about half the global average outside Japan, according to Bank of America Merrill Lynch indices.

Even after the cost to the borrower of swapping some or all of the funds into another currency, those prices can look attractive.

Last August, for example, Australian lender Westpac gave up a few dozen basis points to swap yen into US dollars in five years, but still paid about 30 bps less than a new dollar deal.

Meanwhile, for a Japanese buyer used to receiving measly spreads from even subinvestment grade domestic companies, those yields can look good too.

"The majority of buyers of samurai are financial investors such as life insurance companies and pension funds," says Ken Koizumi, managing director of debt capital markets at Goldman Sachs in Tokyo.

"The yield from Japanese government bonds and domestic corporate bonds is very low, but they need to make profits," he adds.

Since 2009, an occasional boost has come courtesy of guarantees on the repayment of principal, supplied by the state-backed Japan Bank for International Cooperation (JBIC). That has enabled the sale of samurai by a wide range of lower-rated developing countries.

JBIC says it wants to boost use of the yen as an international currency, while providing domestic institutions with a wider choice of investment opportunities.

"From the perspective of a Japanese investor, it is like taking Japanese government bond risk, with a hefty spread on top," says Kazuhide Tanaka, head of long-term funding for Japan at Rabobank, a frequent samurai issuer.

As risk assets have rallied this year, some lower-rated issuers have sensed an opportunity. The government of Turkey, for example, hired banks last month for a $1bn, JBIC-guaranteed offering of 10-year samurai bonds, seeking a yield of just a few dozen basis points above the benchmark yen swap rate.

At current rates, the yield could be about a quarter cheaper than when Turkey tapped Japanese investors for $2.4bn last March, in the biggest deal by a sovereign issuer in a decade, according to Bloomberg.

This is not a market for everybody at all times, of course. Investors still look askance at European names - especially after Norway's Eksportfinans, a once rock-solid samurai issuer, was cut seven notches to junk by Moody's last November.

US issuers, responsible for about a third of the outstanding samurai paper, may be shut out of the market altogether, if tax authorities in Japan and the US cannot resolve their differences.

Under a change in US law that takes effect this month, US samurai issuers will no longer be able to deduct their interest costs for newly issued bonds, while investors will be subject to a 30 per cent withholding tax on their coupon payments.

JPMorgan and Goldman Sachs have rushed to get samurai deals away before the deadline, says Kyoko Kaji, credit analyst at Nomura.

Hidechika Fukushima, managing director of debt capital markets at Mitsubishi UFJ Morgan Stanley Securities, says: "Some kind of solution should be found in order for us to bring US issuers to the samurai market again."

In spite of the US problem, the pipeline looks strong, say bankers. The government of Mexico may even look to issue samurai without a JBIC guarantee - testament both to strong demand and to better informed buyers, says Mr Tanaka at Rabobank.

He contrasts the sturdiness of the market last year with the turmoil a decade earlier, when the troubles of US car companies shut the market for everybody else. "Now, investors are more selective," he says. "They don't take such a simplistic view."

The basic driver remains simple enough. As long as domestic interest rates stay rooted near zero, yield-hungry institutions are likely to continue to hunt for opportunities outside their own borders.

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